Income Inequality Is Impacting Your Nonprofit

There’s a potential silent killer of nonprofit revenue out there, going largely unnoticed. It’s income inequality, and we’d be wise to start paying attention.

Like any for-profit enterprise, nonprofit leaders are charged with generating revenues, not to satisfy shareholders, but to fulfill their organizations’ missions. For that reason, CEOs and chief development officers are sensitive to events and trends in society that affect revenue for better or worse.

Sometimes the events are easy to spot, like COVID-19. Many nonprofits have noted how the pandemic compromised their fundraising and revenues. Nonprofits responded out of necessity. COVID-19 was like a heart attack; the patient was in acute distress. But income inequality is another threat to nonprofits’ well-being, one that is easily overlooked. This threat doesn’t manifest as a crisis; it’s more like a cancer, eating away at the body of social good little by little, day after day.

According to a 2021 study, for the first time since 2000, fewer than half of U.S. households donated to charity, according to a study from Indiana University's Lilly Family School of Philanthropy. It’s true that the absolute number of dollars donated is still at a record high, primarily due to donor demographics: Older donors tend to give more, and the baby boomers have reached the age for nonprofits to maximize their largess. Nonetheless, this trend is troubling.

The study identifies declining levels of trust in institutions among Americans as one factor contributing to the decline in philanthropy. And bad news if you’re playing the long game — and you should be — mistrust is particularly pronounced among millennials, who will be needed to step up as baby boomers die off.

How does income inequality factor into all of this? At first look, you might think that it’s simple: there are fewer people who have disposable income to give because of wage stagnation. While this is undoubtedly true to some extent, it turns out that income inequality produces serious psychological effects that also play into the equation.

All this and more are discussed in the brilliant book, "The Broken Ladder: How Inequality Changes the Way We Think, Live and Die" by social psychologist Keith Payne. The key message of the book is that well-off people may come to see themselves as deprived because they feel relatively poor. “Relative” is the crucial word here because it turns out that a person perceives one’s social and economic status by comparing oneself to others. That is to say, the amount of money you have isn’t what determines your sense of well-being; what matters is how you feel about it, your subjective feeling about how wealthy you are.

Inequality is behind all kinds of bad outcomes, both for nonprofits and society at large. You’ll be less likely to give to charity when you feel less wealthy. And there are more, darker consequences.

Although Americans are far wealthier as a nation than countries like Canada, Sweden or Japan, Americans report being far less well-off. Even in our affluent society, feeling poor relative to your peers is detrimental to your health, is responsible for greater morbidity and impairs your ability to make long-range plans. The stress you feel from thinking of yourself as being lower on the ladder causes you to think more in the short term. Again, this is not good for nonprofits that often promote their missions based on future benefits.

There is an argument (maybe the only one) that one good outcome of income inequality is that it enables wealthy philanthropists to make large charitable contributions. But relying on the rich (and ultra-rich) can be a dangerous proposition. Research has shown that people with higher incomes tend to give a smaller percentage of their income to charity than do middle and lower-class people. So, there’s strength (dollars and sustainability) in larger numbers giving a little, rather than smaller numbers giving a lot.

How can nonprofits combat the effects of income inequality? It’s a difficult question that will take a great deal of thought, strategy and planning to address. 

1. Up your communications game. Connect with people in a way that makes them feel their values are in lockstep with your mission. It’s more important now than ever to help them connect to an idea larger than themselves.
2. Focus on something that matters. Studies show that simply finding something that has personal significance, can greatly diminish how a person experiences feelings of inequality. It causes people to forget about what others think about them. Focusing on deeply held values makes people more likely to eschew immediate gratification in favor of longer-term benefits. In the case of nonprofits, that means donating to make the world a better place.
3. Engage meaningfully with your supporters. By doing this, we can make their lives better. Upward social comparisons, like comparing yourself to those who are wealthier, make you feel poorer and less talented. However, focusing on others who are less fortunate and making downward comparisons can result in gratitude. When we compare ourselves to those lower on the social ladder, we often realize that, without some breaks along the way or under different circumstances, we could also find ourselves on a lower rung of the ladder.

Unconvinced that social comparison is really this invisible hand that nudges behavior? Consider this — when flying, the odds of witnessing air-rage on the part of a passenger in coach is four times higher if the plane has a first-class section. Having a first-class section is the equivalent source of stress as a nine-and-a-half-hour flight delay. 

Since "The Broken Ladder: How Inequality Changes the Way We Think, Live and Die" was published in 2017, income inequality in America has only gotten more extreme, with no end in sight. It’s already impacting who does and does not support nonprofit missions. Understanding how income inequality shapes people’s thinking can make us more effective in engaging with them. The result? Greater success of our missions and happier supporters.